Competition Between eBay and Craigslist Leads to Litigation

In April 2008, the internet auction site eBay filed a stockholder lawsuit against Craigslist, the online classified site. The complaint alleges that Craigslist directors and controlling shareholders, Craig Newmark and James Buckmaster, breached their fiduciary duties by unfairly entering into self-dealing transactions. EBay, as the third and only other stockholder in Craigslist, claims these transactions resulted in the wrongful dilution of its stock (from 28.4 percent to 24.85 percent). Craigslist responded by filing a lawsuit in California that exposed the growing tension between the companies since eBay’s 2004 purchase of the 28.4 percent interest in Craigslist. Craigslist claims eBay continually tried to exert control over the company and asks the court to restore eBay’s holdings to Craigslist. The complaint also accused eBay of “business interference, false advertising, phising attacks, and free-riding.”

Craigslist contends that eBay made improper demands for confidential information with the intention of using that information in operating the rival classified site, Kijiji.com. An eBay spokeswoman responded, saying “We regret that Craigslist felt compelled to resort to unfounded and unsubstantiated claims in order to divert attention from actions by Craigslist’s board that unfairly diluted our minority interest.”

As the only third-party stockholder, eBay held a position on Craigslist’s board of directors. The current litigation raises questions as to whether company executives should hold seats on a rival’s board. Subsequent questions also arise as to what recourse a company has when it believes an investor is using information acquired from a board position to strengthen a competing business.

So, why did Craigslist agree to a board seat for eBay in the first place? Craigslist contends it was looking to eBay for help in improving trust and safety on its internet site. In the Agreement, Craigslist could limit eBay’s access to competitive information, but could not ban eBay from board meetings, dilute its investment, or limit eBay’s ability to its stake. Following the launch of Kijiji.com, Craigslist removed eBay from its board position, alleging eBay was using its position to gain a competitive advantage. To defend itself against Craigslist’s claims, eBay may need to prove it did not steal information from Criagslist. This could be illustrated by a showing of non-reliance on proprietary information in its operation of Kijiji.com, or by arguing that its board member was sufficiently restricted from such confidential information.

Both companies could eventually prevail on their respective suits; however, that might mean both a lengthy and costly legal battle. Regardless of the outcome, both companies will likely hesitate before entering into similar agreements in the future.